Question

Houston-based Advanced Electronics manufactures audio speakers for desktop computers. The following data relate to the period just ended when the company produced and sold 41,000 speaker sets:

Sales	$	3,362,000
Variable costs		840,500
Fixed costs		2,310,000

Management is considering relocating its manufacturing facilities to northern Mexico to reduce costs. Variable costs are expected to average $18.00 per set; annual fixed costs are anticipated to be $1,994,000. (In the following requirements, ignore income taxes.)

Required:

Calculate the company’s current income and determine the level of dollar sales needed to double that figure, assuming that manufacturing operations remain in the United States.

Determine the break-even point in speaker sets if operations are shifted to Mexico.

Assume that management desires to achieve the Mexican break-even point; however, operations will remain in the United States.

If variable costs remain constant, by how much must fixed costs change?

If fixed costs remain constant, by how much must unit variable cost change?

Answer 1

1)

sales	3362000
variable cost	(840500)
contribution margin	2521500
fixed cost	(2310000)
current net income	211500

b)contribution margin ratio : contribution /sales

       = 2521500/3362000

         =.75

desired Income :211500*2= 423000

Desired dollar sales : [fixed cost+ desired income ]/contribution ratio

      =[2310000+423000]/.75

         = 3,644,000

2)selling price =3362000/41000=82

BEP(units) =fixed cost /(price -unit cost)

         = 1994000/(82-18)

           1994000/ 64

             31156.25 sets    [rounded to 31156 ]

3)variable cost per unit in US:840500/41000=20.5

a : 31156.25 =Fixed cost /(82-20.5)

      31156.25 =FC / 61.5

    Fixed cost = 31156.25 *61.5 = $ 1916109.38

change in fixed cost : 1916109.38- 2310000 = -393890.63 decrease in fixed cost

b)33156.25 = 2310000/(82-VC]

82-VC = 2310000/33156.25

82-VC = 69.67

VC = 82-69.67 = $ 12.33

Change in unit cost = 12.33-20.5 = - 8.17 (decrease)